SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
LITIGATION RELEASE NO. 15613 / January 8, 1998
SECURITIES AND EXCHANGE COMMISSION v. RAUSCHER PIERCE REFSNES, INC. and
JAMES R. FELTHAM, Case No. CV-98-0027 PHX ROS
The Securities and Exchange Commission today filed a civil fraud
action against Rauscher Pierce Refsnes, Inc. and its former Senior Vice
President, James R. Feltham, in the United States District Court for the
District of Arizona. The Commission's complaint alleges that Rauscher and
Feltham defrauded their financial advisory client, the State of Arizona
Department of Administration ("DOA" or the "State"), in connection with
DOA's issuance of $129,640,000 of Series 1992B Refunding Certificates of
Participation (the "1992B COPs"). As part of the 1992B COPs offering, the
defendants allegedly sold certain United States Treasury securities (the
"escrow securities") to the State at above-market prices. According to the
complaint, inflating the escrow securities' prices reduced the yields on
those securities and enabled Rauscher to make illegal profits at the
expense of the federal government while purporting to comply with the
federal tax laws governing the 1992B COPs offering, a practice commonly
referred to as "yield burning." Rauscher allegedly took an undisclosed
$707,037 profit on its sales to DOA. The complaint further alleges that
Rauscher and Feltham failed to inform their client of this profit or that
any of the sales prices of the escrow securities had been inflated.
Instead, Rauscher and Feltham issued a materially false tax certification
(the "Certification") in connection with the sale of the escrow securities
which falsely stated that Rauscher's sale prices for the escrow securities
equalled their "fair market value," that Rauscher's sale of the securities
was an "arm's length transaction," and that Rauscher had priced the escrow
securities without regard to the yield of those securities.
The Commission's complaint further charges that the State's ability to
successfully market the 1992B COPs depended on the securities' tax-exempt
status under federal law, and that the defendants' alleged overcharges in
violation of applicable tax laws and regulations jeopardized the tax-exempt
status of the 1992B COPs.
According to the complaint, Rauscher and Feltham charged DOA a
fraudulent and excessive undisclosed markup on the escrow securities, in
that the prices charged DOA for such securities were not reasonably related
to prevailing market prices, and Rauscher's $707,037 profit from the sale
of such securities was unreasonable in light of the circumstances
surrounding the sale.
Finally, the complaint alleges that in their capacities as financial
adviser and investment adviser to DOA, Rauscher and Feltham owed DOA
fiduciary duties to provide DOA with complete information and unbiased
advice and assistance in all aspects of the 1992B COPs offering. The
defendants allegedly violated these duties by failing to disclose the
conflict of interest inherent in their selling DOA the escrow securities as
principal from Rauscher's own account and taking the secret $707,037 profit
while at the same time purporting to give DOA independent investment
advice.
The complaint requests the Court to enjoin Rauscher from violating the
antifraud provisions of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, and Sections 206(1), (2), (3) of the Investment Advisers Act of
1940; to enjoin Feltham from violating Section 17(a) of the Securities Act
of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder; and to enjoin Feltham from aiding and abetting violations
of Sections 206(1), (2), and (3) of the Investment Advisers Act of 1940.
The complaint further requests the Court to order Rauscher and Feltham to
disgorge the profits from their illegal conduct and to impose civil
monetary penalties against them.
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